Let’s imagine that we are observing a long-distance runner named Price. And let’s watch Price today, as he runs in a marathon.
Price awakens this morning, feeling refreshed and energized after a solid eight hours of sleep. He showers, enjoys a bagel spread with peanut butter and a banana for breakfast, and then heads to the race. Once there, Price greets the other racers, then stretches and warms up. His leg muscles feel strong and responsive. Excitement courses through his veins.
Soon, the voice of the race marshal booms over the speakers, announcing that the marathon will begin. Price joins the jumble of runners at the starting line. The air horn blasts loudly. Price takes off across the starting line . . . .
Price’s preparation—disciplined training, good night’s rest, healthy breakfast and warm-up before the race—can be likened to a stock consolidating in a strong and orderly price base, preparing to attract buyers.
When the air horn blares over the speakers, and the racers jump off of the starting line, we can compare it to a stock getting ready to burst out of a low base.
At the starting line, our runner, Price, is fresh and full of energy. Our stock, too, jumps over and above its starting line (base) price, energized by demand and new buyers.
Now, the race is on. Price paces himself and feels his body move into a steady rhythm. After running for about three miles, he slows to a walk. He accepts water and a banana from race assistants to replenish his energy. Soon, however, he takes off running again, intent on performing well.
Our stock, too, slows after the first “run up.” It “rests” as sellers pocket initial profits. After taking a few days or weeks to retrace or step sideways, it starts higher, infused with demand from new buyers.
And so our marathon continues. Price runs for another three miles, then slows again to rest his legs and nourish his system with food and water. Our stock sprints higher for days or weeks at a time, then slows its pace to accommodate intermediate-term profit-taking.
At the marathons’ 26-mile conclusion, Price uses all his remaining energy to cross the finish line. Our stock does the same, pushed by buyers to reach new highs.
Finally, with the marathon completed and our stock’s uptrend completed, both our runner, Price, and our stock must–and will–stop running for at least a few weeks, perhaps longer.
As you can see, the comparison between a runner racing in a marathon and a stock in an uptrend is instructive. Runners must train–and stocks must build sturdy bases–to endure long races and uptrends. Both can run steadily for a period of time, but then both must slow down and rest.
At the conclusion of the race or uptrend, both will stop running or moving higher for an extended period of time. No runner can race forever. No stock can run higher forever. Smart marathon runners prepare and enjoy running. Smart traders and investors participate in strong stocks in early uptrends and profit as long as that trend is intact.
Below is a weekly price chart of the Walt Disney Co. (DIS). Note that DIS crossed a “starting line” early in 2013 at ~ $50, stopping to rest a few times along its uptrend and attract new buyers. Then, after rising to over $67 in early May, the media behemoth slowed to an extended “summer rest” from April to September. We can see that it experienced profit-taking during that time; some traders may have chosen to take profits. In September, with renewed vigor, a re-energized DIS dashed higher once again, moving to touch $76 by the end of 2013.
Walt Disney Co. Weekly Chart
Chart courtesy of RealTick
Since the February of 2014 (DIS slowed with the broad market in January), DIS has climbed in an uptrend, from about $69 to an all-time high of $91.14, which it touched in late August. Note the “rest stops” along the way, especially in March. Will Disney’s uptrend on our weekly chart come to an end, at least for a period of time? Yes.
In future updates, we’ll talk more about stock uptrends—how we can recognize “low bases” and great potential “starting lines.” We’ll also discuss how we can spot when a price uptrend ends.
Until then, please remember that strong stocks and strong marathon runners have a lot in common. Both can run high and fast . . . and both need rest. This knowledge can help you profit from the up-moves, and manage risk during the rest periods.
Take care and keep green on your screen!